OECD GOOD PRACTICES OF PUBLIC ENVIRONMENTAL EXPENDITURE MANAGEMENT

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1 OECD GOOD PRACTICES OF PUBLIC ENVIRONMENTAL EXPENDITURE MANAGEMENT Jean-Philippe Barde OECD Environment Directorate 4th Regional Workshop on Fiscal Policy and Environment ECLAC, Santiago Chile 24 January

2 BACKGROUND What are environmental expenditures? PAC expenditure: : directly aimed at prevention, reduction and elimination of pollution/nuisances from production or consumption of goods and services Incurred by: : public sector, business sector, private households and specialised producers of PAC services Total expenditure = investment + current expenditure 2

3 FROM PAC TO ENVIRONMENTAL EXPENDITURE Pollution abatement and control (PAC) [air, water, waste, soil, noise, radiation] Protection of biodiversity and landscapes Mobilisation of natural resources. (e.g. water supply) Other natural resource Management (agri-env.. payments, sustainable forestry) Risk prevention (natural, technological) Environmental protection Environmental extended expenditure 3 Environmental management

4 PUBLIC ENVIRONMENTAL EXPENDITURES Incurred directly by: General government (central, regional, local) Other quasi-governmental entities financed by Government Type of expenditure 4 Provision of environmental public goods such as drinking water supply, sanitation, public waste collection and treatment, public environmental infrastructures

5 5 Public PAC expenditure, early 2000s or latest available year as % of GDP in USD per capita Business Private specialise d producers Total* Public Business Private specialise d producers Canada Mexico Japan Korea Australia Austria Belgium Czech Republic Denmark Finland France Germany Greece Hungary Iceland Ireland Italy Luxembourg Netherlands Norway Poland Portugal Slovak Republic Spain Sweden Switzerland Turkey United Kingdom *excluding households. Total*

6 OECD PAC expenditure, early 2000s Public Business Air 5% Other 8% Other 10% Waste 35% Air 32% Water 32% Water 50% Pie 1 Pie 1 Waste 28% Total* Other 8% Air 11% 6 Water 45% Waste 36% Pie 1

7 Overall picture for OECD countries (Early 2000s) PAC effort in the range of 0.6 to 2% of GDP Environmental extended expenditure in the range of 1.2 to 2.4% of GDP Public environmental expenditure : 0.4 to 1.4 % of GDP Up to 3.6 % of total public expenditure 7 Source: OECD

8 KEY ISSUES The PPP Earmarking 8

9 9 Public expenditures and the PPP The PPP is basically a non-subsidy principle Endorsed and promulgated by OECD in 1972, by EU in 1975, embodied in many international treaties, delarations and protocols. EU: Community Guidelines on State Aid for Environmental Protection (2001) set the limits and conditions applicable to environmental subsidies. Public environmental expenditures are not necessarily subsidies. Public expenditure for the provision of public goods and open access infrastructures are allowed. Key principle: NO TRADE DISTORTIONS

10 To earmark or not to earmark EARMARKING: PROS Politically popular Can be useful for funding special catching- up urgent environmental programmes Transparency of revenue use 10

11 EARMARKING: CONS 11 Leads to inefficient patterns of public expenditures. Introduces rigidities to adapt to changing priorities. Can lead to over-investment and spending. Tends to perpetuate beyond the useful time (vested interests of fund managers and beneficiaries, I want my money back ). The financing and steering functions of taxes are blurred. Potential contradiction with the PPP.

12 Based, inter alia,, on: GOOD PRACTICES OECD Best Practices for Budget Transparency (2000). Good Practices of Public Environmental Expenditure Management (OECD, 2003) Handbook for Appraisal of Environmental Projects Financed by Public Funds, (forthcoming) 12

13 OECD Draft Council Recommendation (2006) Objectives: - To provide guidance to environmental agencies on how to design and implement public environmental expenditure programs in line with international good practices and according to the principles of sound public finance - To provide a structure for evaluation of performance of a public environmental expenditure program 13 Target Audience: - Environmental authorities - Public and private implementing agencies - External auditors and potential investors

14 Three checklists for measuring compliance with Good Practices of PEEM: - Environmental Effectiveness - Budgetary Good Practices - Management Efficiency 14

15 Checklist 1: Performance in Terms of Environmental Effectiveness Additionality and consistency with other environmental policy instruments Sound and well-defined programming framework: Publicly available program Measurable, agreed, time bound objectives 15 Clear indentification of of environmental outcomes (indicators, CBA, monitoring, sanctions)

16 Maximising environmental effects from available funds cost-effectiveness is an essential quantitative basis for project selection and an indicator of institutional performance Leveraging additional private and foreign finance for the environment 16

17 Checklist 2: Performance in Terms of Budgetary good practices 17 Fiscal integrity of revenue (compliance with fiscal rules, regular accounting) Earmarking should generally be avoided. When applied, should be limited in time; perverse effects prevented High standards of fiscal discipline: expenditure balance revenue; fiscal supervision, control and external audits

18 Accountability and transparency accountable for performance to the government, Parliament and the public Collection of revenue and public procurement separated from expenditure management 18

19 Checklist 3: Performance in Terms of Management Efficiency 19 Sound governance: consistent rules rather than ad-hoc decisions; transparency to the public; supervisory board Professional executive management de- politicised and accountable for decisions Sound project cycle management project cycle is subject to transparent and written procedure and clear and verifiable criteria; appraisal systems in place

20 Fair and unbiased relations with external stakeholders information provision and communication with applicants is proactive and fair Effective management of financial products and related risks financial products are adjusted to risk management capacity 20

21 THE OECD DRAFT COUNCIL RECOMMENDATION RECOMMENDS that member countries take effective measures to ensure that public environmental expenditure programmes are environmentally effective, economically efficient and managed in accordance with sound principles of public expenditure management. 21

22 22 II. RECOMMENDS that Member countries should take the following steps: Define priority environmental objectives using evaluation methods, such as risk assessment, cost-benefit analysis and cost-effectiveness analysis, as well as participatory political processes. Demonstrate that public expenditures are necessary to achieve these objectives. Define the sources of funds, the size of the budget, and the terms and conditions of the expenditure programme. Authorise an appropriate institution to manage the expenditure programme. Continue,, modify or terminate the expenditure programme in light of periodic reviews of the programme s s performance to assess whether its objectives have been achieved and its continuation is necessary.

23 FURTHER RECOMMENDS that, when establishing, reviewing or reforming public environmental expenditure programmes,, member countries make use of the checklists 23 IV. INSTRUCTS the Environment Policy Committee and other relevant bodies of the Organisation to further support member countries' efforts to implement efficient and effective public environmental expenditure programmes,, in particular through country environmental performance reviews

24 MEASURING PERFOMANCE OF PEEM Performance Triangle of the National Environmental Fund of Moldova, 2003 Environmental Effectiveness ACTUAL PRFORMANCE BEST PERFORMANCE FRONTIER 24 Management Efficiency AREA FOR IMPROVEMENT Budgetary Good Practices

25 Define environmental policy objectives Can these objectives be achieved without government financing? NO YES 1.a. Choose other policy instruments and save money 2. Define sources of funds, size of financial envelope and expenditure program Are existing government institutions capable/willing to manage expenditure program directly? NO YES 2.a. Assign additional tasks to existing government institutions 3. Design/establish implementing agency to manage expenditure program Does institutional set-up guarantee performance in terms of: environmental effectiveness? fiscal prudence? management efficiency? 25 NO YES 3.a. Reform institutional set up 4. You are ready to disburse public expenditure!